Improving Financial Literacy
International Conference “Knowledge and Competencies for Innovation Society”
Summary of discussion
April 18-19, 2006

The coming decades will see an increased need for financial education in both developed and developing countries. In developed countries, the increasing number and complexity of financial products, the continuing shift in responsibility from governments and financial institutions to individuals, and the growing importance of individual retirement saving will make it imperative that financial education be provided to all consumers, including in schools so that individuals are educated about financial matters as early as possible in their lives. In the developing countries, the growing number of consumers becoming involved in newly developing financial markets and newly liberalizing economies will necessitate the provision of financial education if these markets and economies are to expand and operate efficiently. In addition, the substantial growth of international transactions during the last decade, resulting from new technologies and the growing international mobility of individuals makes the issue of improving financial literacy increasingly an international concern.

Definition of financial literacy

Financial literacy can be defined as the capacity to sufficiently understand financial market products, concepts and risks in order to make informed choices, to identify and avoid financial abuse, and to take other effective actions to improve well-being.

Why financial literacy is important

• The level of financial literacy influences households’ day-to-day money management and ability to save for long-term goals. Ineffective money management can result in behaviors that make consumers vulnerable to severe financial crises. On the other hand, greater risk management capacity of households can be an integral part of policy and regulatory changes aimed at preventing such crises and making financial systems more stable.

• Along with good employment prospects, financial literacy can play a key role in helping individuals build adequate long-term savings. In many countries where pension reforms are progressing, households will take more responsibility in managing their own financial risks and investments, and it is all the more important for governments both to explain to the public the need for pension reform, and to provide information and education that will enable individuals to make appropriate investment decisions.

• Better understanding of financial products, concepts and risks may have a strong positive impact on consumers' behavior in both developed and developing countries. In developing countries improving financial literacy can also contribute to the reduction of poverty.

• The lack of financial literacy can be an obstacle for the development of particular financial instruments and markets that would benefit the household sector and the financial system, including insurance companies and pension funds.

• The lack of financial literacy may also create more favorable conditions for deceptive financial practices and unfair competition in financial markets. This could be a serious impediment to effective financial intermediation. In contrast, well-informed and educated financial consumers lead to better financial markets where rogue products are forced from the marketplace and confidence is raised.

• Financial education and consumer protection cannot substitute for each other, but are complementary. The government responsibility is to specify the scope and the format of information that financial institutions have to provide to their clients on financial products and services. At the same time, better financial education will help in avoiding excessive regulation of financial services providers.

• In most countries, surveys show lack of household knowledge of even basic financial issues. At the same time, people tend to overestimate their financial literacy and thus are unlikely to improve the situation on their own. While such shortcomings are not new, it is increasingly urgent to address them, and governments can play an important role by raising public awareness of the problem and by promoting broad-based financial literacy.

Objectives of financial education

The following main objectives are pursued in financial education:

• To educate individuals in order to help them with making informed and prudent financial decisions and avoiding deceptive financial practices.

• To enable households to effectively manage their debt burden, thus reducing risks to the financial system.

• To raise public understanding of necessary reforms, such as changes in the pension system.

• To enhance the capacity of policy and law makers to design prudent standards and monitor system-wide risks

• To assist parliamentarians in designing legal framework

Key players and their responsibility

The main providers of financial education are

• Schools and other education institutions

They are considered to be an important starting point for general financial education. However, school education is not enough because of rapid development of financial markets. Educational programs for adult should also be developed. In addition, universities and business schools have an important role in training financial specialists able to provide the public with high quality advice on financial matters.

• Workplace

It can reach most adults and is therefore a potentially powerful place to get information about a number of financial services (retirement schemes, insurance, etc). There is some empirical evidence that workplace related education can exert a strong influence on key personal financial decisions.

• Government

Many governments are actively involved in the provision of financial education about consumer credit, investment, and other financial issues, often as part of a public policy campaign to improve the protection of individual borrowers and investors (e.g., as part of ongoing pension reform efforts). Governments are also well placed to raise public awareness of the need to improve financial literacy.

• Financial institutions

Financial institutions are in a good position to provide targeted financial advice tailored to each individual’s financial situation and risk profile. By providing understandable and unbiased information and by being clear about their role in the process, financial institutions can strengthen the role of financial education, mainly by increasing individuals’ awareness.

• NGOs and other independent bodies

A key role of these institutions is to provide independent, unbiased information about financial products. Such information enhances competition and enables market participants to compare products and better allocate their resources according to their risk-objectives.

• International organizations

They are well positioned to coordinate international surveys and studies on the various aspects of financial literacy and education, to evaluate the comparative efficiency of various financial education programmes, and to develop guidelines and good practices for policymakers in the design and implementation of effective financial education programmes. International agencies can also provide a forum in which countries can compare and discuss strategies to educate consumers about financial issues.

Delivery mechanisms

The content and delivery of financial education should correspond to the needs of specific sub-groups of consumers (i.e. young people, elderly people, the less educated)

The following instruments can be used for financial education:

• Presentations, lectures, conferences, symposia, training courses and seminars. Workplace related and context-specific education seems to have most impact.

• Publication in diverse forms, including books, brochures, magazines, booklets, direct mail documents, etc. There is no strong evidence of the efficiency of that type of education.

• TV spots, and other types of media, such as CD-ROMs and videos. That seems to be effective for marketing of reforms, i.e. pension reforms.

• Websites, web portals, and other online services. They are useful for those already interested but may not reach out to those who need it most.

• Other methods include advisory services form institutions, including telephone help lines

Not only the supply of financial education but also the demand is very important. Most delivery channels are good for those who are already interested in particular topics. One of the tasks is to create demand for financial information and education.

Taking action to improve financial literacy

Next steps on improving financial literacy should take full advantage of the work already accomplished and underway. For example, OECD governments published a Recommendation on Principles and good Practices for Financial Education and Awareness. These principles and good practices are designed to encourage governments, financial services providers, and organizations such as consumer groups to do more in this area and include the following:

• Governments and all concerned stakeholders should promote unbiased, fair and coordinated financial education;

• Financial education should start at school, for people to be educated as early as possible;

• Financial education should be part of the good governance of financial institutions, whose accountability and responsibility should be encouraged;

• Future retirees should be made aware of the need to assess the financial adequacy of their current public and private pensions schemes;

• National campaigns, specific web sites, free information services and warning systems on high-risk issues for financial consumers (such as fraud) should be promoted.

Initiatives for future work on financial education

• To undertake a major study at the international level on financial literacy among young people and on the state of financial education in schools that would assess the current availability and effectiveness of suitable school-based programmes.

• To develop recommendations and good practices for financial education in the areas of pensions and insurance.

• To organize policy dialogues targeting key developing countries, such as India, China, and Brazil, to provide them with the knowledge and good practices that the OECD and others have accumulated in this area.

• To raise awareness of the implications of policy and regulatory changes in the financial sector for the household sector risk profile and financial education needs

• To evaluate regularly the level of financial literacy (international surveys).

• To provide an assessment of the current availability and effectiveness of educational programs (including for policy and law makers), and further develop international good practices.

• To clarify the comparative advantages and roles of various public and private organizations which deliver financial information and education to households.

• To develop an international network of educational institutions and government agencies providing financial education that would promote exchange of best practice and ensure wide availability of financial literacy programs.